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Risks Of Investing In Medical Cannabis

FYI | Jun 07 2017

By Atlastrend

Six risks of investing in the medical cannabis industry

In a change of pace from our usual research, we take a look into medicinal cannabis, which has shown that it may provide an alternative solution to some of mankind’s most untreatable diseases.

Cannabis originated from an ancient herb discovered almost 4,000 years ago. It belongs to a family of plants known as Cannabaceae where there are over 700 known cannabis varieties. Research has found that the health benefits of medicinal cannabis stem from two active components, cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”).

Of the two, CBD has been shown to have a greater scope of medical application than THC and does not induce the psychoactive effects associated with marijuana use. Initial testing of medicinal cannabis has shown it to be very effective in treating several diseases and is especially effective in managing symptoms such as nausea, epilepsy and post-traumatic stress disorder.

Medicinal cannabis’ spotlight in the scientific and medical professions has led to its legalisation in key markets around the world, leaving a space for businesses to step in to an untapped portion of the medical industry.

In the U.S., companies such as GW Pharmaceuticals (GWPH US) and Insys Therapeutics (INSY US) are both actively developing cannabis-based medicines. GW Pharmaceuticals is the largest biopharmaceutical operator in this space having developed a new drug called Epidiolex, a liquid formulation of cannabidiol, which is used to treat childhood-onset epilepsy disorders and is currently awaiting FDA approval. Insys Therapeutics is another biopharmaceutical company in the medicinal cannabis space and has two cannabis-based drugs approved for commercial sale with their most recent drug, Syndros helping to boost appetite for cancer and AIDS-related patients suffering from weight loss.

Quantifying demand and regulatory outlook

According to MCG Pharmaceuticals ((MXC)), it was estimated that the value of the global medicinal cannabis industry was US$2.7 billion in 2016. The integration of cannabis into adjacent markets such as cosmetics and medical devices could see the overall global opportunity be actually 2 to 3 times more than the current market size.

Currently, the key markets where medicinal cannabis has been legalised include Australia, the U.S., Canada, Europe and Israel. According to research from the Hydroponics Company ((THC)) the legal cannabis market in the U.S. is estimated at US$5.9 billion, and is projected to grow at a compound annual growth rate of 29% over the next four years to reach US$20.6 billion by 2020 based on further legalisation by the remaining states and greater medical application of cannabis based medicines.

As at October 2016, there were approximately 1.44 million medicinal cannabis patients in the U.S. and in Canada, there have been 23 licenses issued to produce medicinal cannabis and approximately 55,000 registered medicinal cannabis users and is forecasted to increase to 450,000 by 2024. The North American market accounts for the largest portion of global demand for medicinal cannabis based on predicted future user growth and a friendlier regulatory environment.

Israel, unlike most countries have allowed patients to receive reimbursements for medicinal cannabis from health insurance providers. This is considered a progressive step towards integrating medicinal cannabis into the health system and if other countries follow suit, it could boost demand far beyond current estimates.

In Australia, amendments to the Narcotic Drugs Act 1967 have allowed the production of cannabis for medical and scientific purposes. To date, production has been very tightly regulated and getting cannabis-based medicines approved by the Therapeutic Goods Administration (“TGA”) has proven to be difficult and expensive. According to a report submitted by the University of Sydney and MGC Pharmaceuticals, the TGA approval process takes roughly a year to complete requiring extensive clinical testing and costs A$250,000 per new chemical entity. Because cannabis is a mixture of various chemical compounds, it has proven to be very difficult to receive TGA approval for medicinal grade cannabis products. This has somewhat dampened demand in Australia and proves how the regulatory environment can play a big factor in a product’s success.

Health benefits may strengthen demand

There are positive signs that demand will strengthen due to new research which has highlighted some of the many applications of medicinal cannabis. According to a study done by the University of Sydney, medicinal cannabis is effective in treating neurological diseases such as epilepsy and multiple sclerosis. It also helps with pain management associated with AIDS/HIV and cancer, reportedly aiding sufferers in sleeping and returning to a normal diet.

The World Health Organisation has noted that epilepsy is one of the most common neurological diseases in the world, with 25,000 people being diagnosed each year. In addition to this, 22.5% of people are diagnosed with ‘pharmacoresistant epilepsy,’ a form of epilepsy that cannot be treated by frontline anti-epileptic medicines but can be treated by medicinal cannabis.

Medicinal cannabis has provided highly effective treatments to some of world’s most difficult to treat conditions and as efficacy heightens and regulations are relaxed, demand is likely to accelerate.

The risks faced by investors

While there are positives in this story, there are many risks associated with the medicinal cannabis industry:

  1. Illegal use of drug leading to tighter regulation and controls: there is always the possibility that the legalisation of medicinal cannabis can lead to illegal use and on selling. If this happens it is likely to force governments to tighten regulation on production and supply, which will impact private businesses.
     
  2. Community disapproval of medicinal cannabis: Medicinal cannabis is still very closely associated with the illegal use of marijuana, this can lead to negative sentiment from the wider community about the use of the drug and can act as an impediment to businesses entering new markets or getting further support in existing markets. This is likely to be exacerbated if evidence of illegal use emerges.
     
  3. Extended clinical trials showing adverse results: Testing of medicinal cannabis is still in its infant stages and as such, long term clinical results are not available. If it is found that the positive effects of medicinal cannabis are outweighed by the negatives or if its use causes adverse side effects in the long term, its use may be further restricted.
     
  4. Sustainability of licence agreements: Due to the nature of its illegal counterpart, the medicinal cannabis industry is highly regulated and with the laws constantly changing there is a possibility that existing licence agreements businesses have with countries may change or be rendered unprofitable in the long run.
     
  5. Difficulty of getting medicines approved: Getting cannabis based medicine approved can be exceedingly difficult and pharmaceutical companies would have to accept the regulatory risks when developing cannabis based medicines. This can make investment into the medicinal cannabis industry unattractive due to the high costs and heavy regulatory oversight by governments.
     
  6. Manufacturing difficulties: In interview with the Managing Director of Auscann ((AC8)), Elaine Darby, some of the hurdles faced by companies in the industry were discussed. The manufacturing of cannabis based medicine proved particularly challenging, stating that “the key limitation is to have expertise to grow and produce standardised medicine so that every batch is the same. There’s lots of expertise required to do that.”

The market for medicinal cannabis is still in its infancy and remains relatively small even if the potential for growth is high. While it may provide many practical health benefits to users, there are many risks associated with the industry including selecting which companies will be the potential beneficiaries of the growth. As such, we would suggest that it is too soon have an entrenched long term position in the sector.

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Atlastrend Pty Ltd (ABN 83 605 565 491) is a Corporate Authorised Representative (No. 001233660) of Fundhost Limited (ABN 69 092 517 087, AFS License No. 233045). Any advice contained in this communication is general advice only. None of the information provided is, or should be considered to be, personal financial advice. The content has been prepared without taking into account your personal objectives, financial situations or needs. If you consider it necessary you should seek your own advice before making any financial or investment decisions. The information provided in this communication is believed to be accurate at the time of writing. None of Atlastrend Pty Ltd, Fundhost Limited or their related entities nor their respective officers and agents accept responsibility for any inaccuracy in, or any actions taken in reliance upon, that information.

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